Monday, September 10, 2012

Will They or Won't They

Currently the big question is: Will the Federal Reserve step in with a stimulus package or won’t they? Given the sad state of job growth, as reported last Friday, and the number of people still out of work, it seems likely that the Fed will do something. The next questions are: what will they do and what will be the impact? It appears to me, from reading reports since late August, that the Fed is likely to begin a new bond buying program that will push down interest rates on bonds, which have been rising. This in turn will make borrowing cheaper, helping to stimulate the economy and driving equity prices higher. That at least is the theory. The reality may be that stock prices have already accounted for the Fed’s action since it became clear at the August Fed meeting they would do something to stimulate the economy. When the Fed does announce their plan, equity markets may be susceptible to disappointment. That in turn could drive equity prices down. Across the pond the question is: Will the Central European Bank buy more Greek bonds and will they give additional help to Spain and Italy? Based on reports late last week, the Spanish and Italian governments got a clear sign that what they were doing for austerity was sufficient, while the results in Greece were disappointing. Looking at Greece’s issues it seems more and more likely that they will leave the European Union. Many large companies are already preparing for such an event. The impact of such a move on Europe and the U.S. is unknown but will likely be negative in the short run. All of this is in part due to the aftershocks of the subprime mortgage fiasco of 2008. Have we learned anything? Today the Wall Street journal reported that the booming car sales of August were helped along significantly by lenders making significant subprime car loans. Ed